Mapping the Secrets to Crowdfunding Platform Successes & Failures

Crowdfunding is a hot-topic these days, and ever since I was invited to animate a panel at IdeaLab! last October, I’ve been trying to wrap my head around the evolution, the trends, knowing that not every platform that forms today will exist in 5 years, and that not every possible outcome has been tried before.

Over the past few months, I managed to come up with a system not only for categorizing crowdfunding platforms (most of them categorize themselves quite well) but in determining whether I think they will be successful or not. Of course, execution plays a role, but if you start with a bad base, you may be doomed from the start.

The first step for me was to define what exactly is a crowdfunding platform. To keep it general, I decided it was any platform that allowed for the pooling of resources of many people – these resources can go to a company, an individual, or even to a cause. This lines up pretty well with Wikipedia’s one-liner on Crowdfunding, so I think I’m safe here.

When I began looking at the space, the first axis of development was quite clear: Rewards, Equity, and Loans. The “return” for those giving the money can come in these three forms.

The next axis was more difficult: Open vs. Closed. I often refer to this as the “Apple vs. Android” market set-up, but “Curated vs. Meritocratic” works well, too – I talk more about that here. Looking at rewards-based crowdfunding, we instantly see Kickstarter vs. Indiegogo. The two can live in harmony because they attract two different ‘mindsets’ – not necessarily two separate markets, but two different ways of approaching a situation.

In the Loans-based crowdfunding space, we see this with Kiva as the dominant ‘open’ platform, and players like Lending Club, Pret d’Union & Funding Circle in the “Curated” section. This space is interesting because traditional lending players tend to stick to particular markets – hence including Lending Club & Pret d’Union – but also because there seems to be a mental distinction between consumer vs. enterprise, which doesn’t exist in Rewards or Equity-based crowdfunding (the latter, because equity is restricted to enterprise). With Lending Club’s IPO and Pret d’Union’s fundraising (both founded by French entrepreneurs, FYI), it will be curious to see if there will be consolidation (read: acquisition) in the coming years, or if these players will stick to their respective markets.

Lastly, in Equity crowdfunding, I think we’re only starting to see the beginning. While players like Ourcrowd are curating (and even backing their investments), I don’t think we’ve seen a dominant “Open platform” for crowdfunding equity – or at least, there is a doubt about how mass-adopted this will be. Players like Ourcrowd are interesting because they are allowing “the crowd” to participate in their rounds of funding – that’s how I see it, at least – open platforms, however, have yet to show that they are aligning their business model (revenue) with the equity side of things, so I’m curious to see how this will evolve.

What about Verticals? Crowdfunding for X? And Markets?

As mentioned in the Lending section, whether or not certain types of funding will be restricted to markets remains to be seen – everything we’ve learned about the Internet would suggest not, however. That isn’t to say that players like Kisskissbankbank & Ulule will not carve out a nice space for themselves, just that the lion’s share will go to Kickstarter/Indiegogo.

As for verticals, I’m highly skeptical of “Crowdfunding for X” – I recently was introduced to Teezily – Crowdfunding for T-Shirts. I don’t think I need to say more. Frankly, I don’t think vertical-based platforms will receive the critical mass needed to survive. I’d be curious to see from larger players like Indiegogo & Kickstarter how many cross-category funders there are, but I imagine the same person crowdfunding a video game is likely to crowdfund a film as well.

Players like Leetchi still leave me scratching my head. I would likely call this “crowdfunded commerce,” if I was sure it was going to carve out its own positioning; however, I’m not sure that other platforms couldn’t eventually integrate a similar commerce feature into their sites. Then again, it doesn’t seem to be in the DNA of the largest players.

What to take away from this

I have more or less declared my bullish or bearish stance on nearly every crowdfunding platform in existence today. I strongly believe that, in these 6 slots, we will see one dominant player rise (we’ve already seen that in some of the spaces) to take the lion’s share of the market, and I strongly believe this will be based on their ability to align their platform’s philosophy & positioning with these Axes.

How an Open, Equity-based crowdfunding platform will look, I’m not sure – perhaps it will be a data-driven VC fund which uses algorithms to determine success rates; perhaps it will be Seedrs, or someone similar to them. For now, the cross-border equity participation market is under-developed – it’s just not that easy to make an Indiegogo via Equity happen – but I think that if you’re looking at a platform today, you should strongly look at their positioning, their ‘currency,’ and any market/vertical restrictions they are placing on themselves.

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Comments (3)

You might be interested in my research into the last 2/3 years of equity CF in the UK. I have compared the main sites (Crowdcube and Seedrs) and logged all the successful pitches and then compared these to the real accounts for these businesses when they come out. The picture certainly is not the rose tinted one painted by the CF PR industry and most of the articles out there. You can expect a very rocky ride for the next two years. Tax reliefs are driving the UK CF sector but if failures pile up, as looks certain, how long will that continue?

Hello Robert! I was one of the first companies funded on Seedrs (Satago). Got to say, if you’re looking at my accounts you’re not going to find any interesting information since – like presumably the other startups from Seedrs – we’ve not filed any accounts yet. I don’t really think you’re going to find out much about the Seedrs companies by looking at their accounts so early, since most of them are still very early and probably (like ourselves) raising further investment. It’s not like doing a full analysis of a publicly listed company! Of course their will be failures – that’s the nature of investing in startups, but it is made very clear to people when they invest.

Where is your research published? I’d like to read what you discovered about us. 🙂

Hi Steven – yes you are right that most of my research involves Crowdcube, BTTF and Squareknot. Seedrs is almosy entirely pre revnue and as far as Im aware they do not publish financials. As you will know, a start up in the UK doesnt have to file acconts for 2 years so none of the Seedrs companies will have filed to date. Seedrs also have a very different set up with investors pooling money through the platform as opposed to as individuals – better in many ways.

I ran some basic figures on a typical 10 business investment scheme and unless the investor is very lucky and providing they can get the full 50% SEIS, you make about the same over 10 years as you would putting the money into a saving account! Continual (almost always unplanned) dilution and the average % that a small pot of money can buy mean that ROI are pretty poor. Its really more of a game for investors – a new form of gambling. Once the failures start rolling in and the EIS and SEIS is removed then most of the investors will leave. Not sure what you consider to be a reasonable failure % – 50, 60, 70? Crowdcube’s ”successes” are to date 0 to 2 closures and at least another 25 out of the 30 who have filed accounts way off target. Id be surpsied of a single one makes it past year 5 and if they do then there will still be no return and no way out. Not sure thats a great picture.